The state of IPOs

Dec 30th 2008

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It's hardly news that the global IPO market took a rough tumble this year, but the extent of the damage is stunning. Through November, the number of deals worldwide plummeted nearly 60 percent compared with the first 11 months of 2007, from 1,790 to 745, according to Ernst & Young's year-end global IPO update. Dollar volume fell from US $257 billion to around $95 billion, the lowest level since 2003.

On a more positive note for the U.S. capital markets, the North American region increased its share of global capital raised, from 13.5 percent last year to 28 percent in the first 11 months of 2008. "As of last year, we reached IPO levels that were consistent with levels that we saw pre-Sarbanes-Oxley," says Jackie Kelley, Americas IPO leader with Ernst & Young LLP.

Kelley expects a rebound next year. "The markets will, absolutely, come back; we've been through many of these cycles in the past," she says. "We don't know the exact timing, obviously, but we are optimistic that we will see some activity later in 2009."Even if the market does revive, though, it's unlikely to see a return to the glory days of the early and mid-'90s, argues David Weild, advisor to Grant Thornton and the clients of Grant Thornton in capital markets. "Since 2002, in the wake of the bubble, we haven't done much better than 200 IPOs a year," he notes. "If you look at how much venture capital is out there in the market, we should be doing well over 500 IPOs a year, but we've never come remotely close to that."

The decline has little to do with Sarbanes-Oxley, Weild is quick to note. Instead, he blames the explosive growth of online brokerage accounts dating back to the days of the dot-com bubble. Self-directed, $25 online trades savagely undercut the traditional retail brokerage commission of $250 and up. Brokers could no longer make a living by digging up new stock ideas for their clients, and the number of small IPOs ($25 million or less) fell into a steep decline.

The decimalization of the exchanges from 2001 onwards was a second blow to IPO activity, Kim and Weild argue. Penny increments crushed the spreads that had allowed market makers to buy small-cap stocks and profitably remarket them. Says Kim: "If you suck all of the economics out of the system, it doesn't function anymore because none of the constituents have any incentive to do the things that they would normally do to keep it healthy."

"We have created a capital market system that caters to traders and speculators," adds Weild. "We've basically shot ourselves in the foot as a nation."